The author is a Forbes contributor. The opinions expressed are those of the writer.

Loading ...

Loading ...

This story appears in the {{article.article.magazine.pretty_date}} issue of {{article.article.magazine.pubName}}. Subscribe

As if the oil price slump was not tough enough, a very visible lack of trust between the world’s leading oil producers is exasperating an already bad situation. In fact, trust among OPEC members itself is at such a low point, that behemoth Saudi Arabia is bemoaning it out in the open.

Speaking at IHS CERA Week in Houston, USA, Saudi Oil Minister Ali Al-Naimi reiterated his country’s stance of "maintaining output" premised on demand picking up excess crude over the medium-term, while at the same time opining that there was "less trust" between the big oil powers, making production cuts an unrealistic option.

In the eyes of the Saudis, a so-called ‘production freeze’ they conjured up with the Russians, alongside the Venezuelans and Qataris, earlier this month, was a litmus test of trust. Judging by response of the Iranians, recently freed from the shackles of international sanctions and wanting to monetize more of their oil barrels, that test has failed. Tehran simply branded it "ridiculous."

The entry position of Saudi Arabia and Russia left a lot to be desired in any case. The Russians have no room to increase production, while the Saudis are running out of parties that would want to import more of their crude. Hence, proposing a production freeze at ‘January’s output level’ was little more than a stunt aimed at seeing how many of their peers sign up to it, and how Iran would respond.

The problem for OPEC as a whole, and not just the Saudis, is an oil market only too aware that most of the cartel’s members are producing to capacity. Furthermore, and precisely because of there being too much crude oil in market, tensions between Tehran and Riyadh have actually served as a drag on the price rather than a sort of pre-2014 geopolitical or risk premium the analyst community was only too keen to pencil in to prop up the price.

In a high stakes game, neither the Saudis nor the Iranians would want to budge on the oil production front, a fact not lost on importers in a buyers’ market. All of this feeds into OPEC’s credibility problem, as it did not even define a production quota [thought to be at 32.1 million barrels per day] at its last meeting in December 2015, let alone specify individual quotas of member nations which it has not done for years.

Actual physical traders I have spoken to find the situation bemusing. Hypothetically, let us say all OPEC members agree to freeze production at January’s levels, so do the Russians and for argument’s sake the Mexicans, to add a few non-OPEC players – all that would do is provide a $7 to $10 per barrel short-term uptick.